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Asset & Wealth Management

What Credit Suisse’s Canopy deal means for private banking

For Credit Suisse, this gives its RMs the chance to advise rich clients on their total net worth, not just what they bank with C.S.

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Credit Suisse’s inaugural partnership with a fintech company is moving competition in private banking onto the digital battlefield.

The agreement with Mesitis, the Singapore-based company behind Canopy, a client portfolio-aggregation service, reflects an effort at the private bank – now in its third year – to harness digital technology to grow revenues.

The products that top-tier private banks can offer are no longer unique. “But the client experience and the channels to access the bank can be powerful differentiators,” Gerald Mackenzie, director in the Asia-Pacific private banking business at CS, told DigFin.

The immediate goal of adopting Canopy is to provide a convenience for wealthy clients that they can’t get elsewhere, but both the bank and Mesitis have more strategic goals for their partnership.

Credit Suisse’s digital private banking platform has helped it engage more with clients: they are already trading more via the CS app. Canopy lets rich people see their portfolio accounts from multiple private banks on one dashboard. By adding Canopy to the CS online platform for clients, it makes it easier for clients to review their entire holdings across private banks while a few keystrokes away from executing transactions within the CS online environment.

Moving the competitive goalposts
That already makes it dangerous for competitors in Asia Pacific, which may be redesigning their own platforms, but on the status-quo model in which those platforms are silos for proprietary data.

Tanmai Sharma, founder of Mesitis, told DigFin that Credit Suisse will be the first bank to offer its client portfolio data to Canopy on a daily basis. For now, in Asia and Europe, banks are still giving clients monthly account updates via PDF, not via direct electronic connection, on condition of the client’s approval. (Banks do provide electronic feeds to clients in the United States, however, where consumer demand prompted banks to provide this many years ago, Sharma said.)

Even if other banks were eager to open up their customer data to an aggregator like Canopy, it couldn’t happen quickly. The process of getting Credit Suisse to offer daily electronic reports “increased my appreciation of how non-trivial that is,” Sharma said. Legacy booking systems are not synced and a lot of work has to go into configuring a bank’s platform to do this.

(For your inner geek: Credit Suisse will be transferring customer data to Canopy via SFTP, or secure file transfer protocol. SFTP is a better-protected version of FTP, a standard network protocol used to copy a file from one host to another over the internet. This is not to be confused with API, application programming interface, which is a tool to allow one piece of software to be used by another.)

The next steps for Credit Suisse in introducing Canopy should send a chill down the spines of its competitors: the bank will encourage clients to use the bank’s app function to view their aggregate assets across different institutions, including asset classes and geographies, said Urs Lichtenberger, director at CS in Singapore.

“We’d like to have clients give our relationship manager permission to also see that total portfolio, so that we an offer them holistic advice,” Lichtenberger explained to DigFin.

While CS executives were quick to say they would not themselves be downloading competitors’ data through Canopy, getting customers to give RMs permission to look at their total portfolio will give the banks’ reps plenty of insight on their clients’ relationships with competitor banks.

Can rival banks do anything about this? DigFin requested interviews with several peer private banks, but they didn’t respond or said they were too busy. Sharma, meanwhile, is betting on this becoming a ‘if you can’t beat ’em, join ’em’ trend.

Harder than it looks
Citing research by CapGemini, Sharma said 75% of rich people in Asia spread their portfolios among, on average, six banks. So each bank has a view on 10% to 15% of a client’s true worth and asset mix. Today, banks in Asia and Europe typically update clients monthly via a PDF or a paper statement.

Canopy’s customers allow it to take these statements – he says 90% or more of the data is from PDFs – and amalgamate them. He hopes more banks will agree to providing daily electronic feeds, as they often do already in the US, and will have to do in the European Union, whose Revised Payment Service Directive, a.k.a. PSD2, will force banks to open consumer data in 2018.

Some bankers may be wary of sharing customer information with Canopy because it goes against the grain of secrecy, or because they think it will only aid competitors, Sharma said. However, he argues the situation is more nuanced. Many banks are trying to be able to provide their clients with daily updates, but the effort gets superseded by other priorities, often related to compliance. Meanwhile, customers in Asia and Europe haven’t been demanding it, either.

“But now Credit Suisse is doing it,” Sharma said, “and we’re talking to other banks. More of them realize sharing data is actually a competitive advantage. Anything their customer trades with Credit Suisse will get updated the next day.”

Sharma’s goal for Mesitis is for it to become a B2B player. He now tracks US$5 billion of rich people’s ‘assets under reporting’, but he wants to gather more banks’ electronic feeds. “I want to go past paper and accumulate transaction data, ticket sizes and prices. That’s the real thing.”

His data analytics, if given enough to work with, can use aggregated account information to work out how which products enabled clients to make the most money – insight that Mesitis can sell back to private banks, so their RMs can work out what products to sell when, and to whom.

For example: “If your bank has a new bond issue it wants to place,” Sharma explained, “we can help predict which clients are most likely to buy it.”

He added: “I want to help banks make money.”

And the banks, in turn, are also developing technologies to do something similar. Mackenzie and Lichtenberger told DigFin that they are exploring artificial intelligence and cognitive computing solutions that could be applied to a client’s total portfolio, without Credit Suisse having access to the data. Rather the AI could extrapolate (or use aggregated insights from a service as envisaged by Sharma).

Mesitis is Credit Suisse’s first fintech partnership but as the private bank takes the competitive battle into the digital space, its executives expect more to follow.

Asset & Wealth Management

Half of Invesco’s China sales now via digital

But as the PRC joint venture learns how to distribute digitally, Invesco remains unsure of robo’s role in Asia.

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Andrew Lo, Invesco

This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. See also strategies from AllianceBernstein and BEA Union Investments. Go here for more insights into digital asset and wealth management.

Invesco is using its joint venture in mainland China, Invesco Great Wall, to figure out digital distribution.

The business now manages about $50 billion of assets, of which about 80% is retail, making it the fourth-largest Sino-foreign fund house in China. Over the past two years, half of retail inflows have come from new digital channels, as opposed to the traditional reliance upon banks, says Andrew Lo, senior managing director and Asia-Pacific CEO of Invesco in Hong Kong.

This is in keeping with a broader trend in the global mutual funds industry, which is shifting from one based on products to one focused more on investment solutions. “There’s an emphasis on designing outcomes for clients, such as through asset allocation or structuring,” to combine types of risk and asset classes.

That’s driven both by client demand as well as market volatility and challenges to active fund houses to deliver alpha (outperformance) on a net-free basis, compared to ultra-affordable passive investments tracking a benchmark.

Reaching retail

That’s been an emerging story for the funds industry over the past decade. But on top of that is a new wrinkle: the ability to use technology to speed up operations and to reach more people.

“Technology is now changing the distribution landscape,” Lo said. “In China, it’s having quite an impact on reaching retail investors.”

For now this has been a story unique to mainland China, where existing bank channels (which dominate funds distribution in most Asian markets) are not well developed, and where regulation favors digital disrupters like Ant Financial.

The power of digital was evident in Ant’s success with money-market funds (under an affiliated fund house, Tianhong Asset Management), but it has now extended to equity and quant products onshore – products that Invesco’s J.V. now sells through fintech channels, including Ant, East Money Information, JD.com (Jingdong) and Snowball Finance (Xueqiu).

This has not been straightforward, however. Fund management companies are designed to cater to bank distributors, and are built on old-fashioned tech.

Still learning

“We learned how to do digital marketing,” Lo said. “It’s very different to traditional distribution. It’s iterative, it changes fast, and you have to listen to customer feedback.” Partnering with digital channels has also required a different sense of product design, and to rebuild the company’s operational process to support round-the-clock digital sales and support.

Lo says the experience will be increasingly relevant as other markets digitalize, although they may need to be tweaked, depending on local regulation, client behavior and distributor demands. “Some things we can learn and apply elsewhere as the world goes digital,” Lo said.

The onshore funds market manages about Rmb14 trillion (almost $2 trillion) in total assets among 135 asset managers authorized to sell to retail clients, of which are 44 Sino-foreign JVs.

But most of these JVs are run by the local partner, with foreign shareholders having less influence. They are limited to stakes no greater than 49%, and local partners are often banks or other powerful institutions. One analyst told DigFin that local fund houses are not particularly bold when it comes to digital channels; and even if they are, the lessons don’t flow to the foreign partner.

But Invesco Great Wall’s case is different. Both Invesco and Great Wall Securities own 49%, with two other shareholders holding another 1% each. Given that Great Wall Securities has its own in-house funds business, it has been willing to let Invesco drive the business. (Beijing has recently permitted J.P. Morgan Asset Management to take a 51% stake in its funds J.V.) Invesco Great Wall is also among the oldest funds JVs in China. It is today led by Shenzhen-based CEO Ken Kang Le.

Robo reservations

In China, Invesco is leading the way in digital opportunities. Elsewhere it seems to be running with the rest of the herd. In the U.S. and the U.K., it has made digital acquisitions: Jemstep, a B2B robo-advisor that services U.S. bank distributors, and Inteliflo, a British platform to support financial advisors.

“We haven’t found the right use case in Asia,” Lo said. Onboarding a digital B2B (of B2B2C) platform needs scale, but Asia is fragmented, with each market requiring its own business and compliance needs.

“Digital transformation is still evolving,” Lo said. “My guess is it can be like it is in China, where it’s a real thing that has become a major part of the industry.” But what that looks like elsewhere remains hard to know – or at least hard for justifying a business case.

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Asset & Wealth Management

New China distribution not just for money-market funds

Investors on digital platforms are beginning to look to other products, says BEA Union’s Rex Lo.

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Rex Lo, BEA Union Investment

This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. We will also provide strategies from Invesco and AllianceBernstein. Go here for more insights into digital asset and wealth management.

Retail investors in China accessing funds via digital platforms are beginning to diversify away from money-market funds. That is creating opportunities to push ETFs and active funds, says Rex Lo, managing director for business development at BEA Union Investments.

China’s retail funds industry is mainly about money-market funds (MMFs). The total industry size is Rmb13.2 trillion, or $1.9 trillion, of which MMFs account for 57%, or Rmb7.7 trillion.

Among MMFs, by far the biggest player is Tianhong Asset Management, whose product, Alibaba’s Yuebao fund, is Rmb1.2 trillion in size, or $162 billion – the largest money-market fund in the world.

It’s no surprise then that digital distribution platforms in China mainly cater to MMFs. Lo says until recently, MMFs accounted for about 80% of all funds sold on digital platforms. This is propelled businesses such as Tianhong (which of course is sold via Ant Financial) and a few bank-affiliated fund houses with big MMF products, such as CCB Principal and ICBC Credit Suisse.

But it has made digital distribution of limited interest for fund houses looking to sell equity funds or other actively managed products; for them, traditional distribution via banks has remained the only viable channel.

MMFs: less big

Lo thinks this is changing, however.

The popularity of MMFs lies mainly in the fact that they offered high returns combined with guarantees, real or assumed by investors – assumptions the government has been reluctant to upset.

Yuebao and other MMFs usually invest in non-standardized wealth-management products (themselves supposedly “guaranteed”, with investors assuming a government backstop), that returned 5% to 8% to those managers. They in turn offered investors 5%, an equity-like return on what’s meant to be an ultra-safe and liquid asset class.

Over the past few years, however, Chinese banking and securities regulators have been trying to shift the funds industry onto a footing that respects risk and return, and clamping down on the supply of shadow-banking instruments available to portfolio managers.

“Today MMFs return only a little over 2%, while A shares are doing well,” Lo said. “As demand for money market funds declines, turnover has fallen, so these distributors are now promoting index or active funds.”

In recent months, Lo says, MMFs account for only 70% of sales on digital channels, with ETFs now gaining ground.

Accessing the mainland market

BEA Union is able to sell its Hong Kong-domiciled Asia fixed-income fund to Chinese retail investors through a scheme called MRF, Mutual Recognition of Funds.

This program, which began in 2015, allows fund managers on either side of the border to sell eligible products through a master-agent arrangement. Regulators in mainland China have been slow to approve such funds, however, and there are only seven Hong Kong products available via MRF, including BEA Union’s (and 48 mainland funds available for sale in Hong Kong).

Lo is hoping to take advantage of the shifting fortunes among asset classes to use digital channels to push BEA Union’s bond fund.

Platforms such as Ant Financial are requesting the fund house for more material around equities and active funds management. It’s a big, long-term commitment to investor education – especially for foreign fund managers whose ranking is low on Ant Financial and other digital platforms.

“Domestic investors want familiarity,” Lo acknowledged. “But we continue marketing because we want to be on the platform. Today it’s more for exposure than real [inflows], and ticket sizes are as small as Rmb100 ($14). But if you have 100,000 investors, that becomes a lot of money.”

The intention of this ongoing marketing is to become sufficiently well known among Ant’s users to take advantage when retail investors want to invest overseas.

New ways of doing business

Adding platforms such as Ant to traditional distribution methods has been an eye-opener, Lo says. “They don’t think like a traditional finance company. They’re a fintech, so they’re very responsive and open to new ideas. And they’re independent – they’re not a bank with its own funds J.V. – so there aren’t conflicts of interest.”

Marketing was not the only part of business that had to adjust.

“I was amazed when we began to work with these firms,” Lo said. “Enhancements that would take months to get done in Hong Kong take them a few days. We can learn a lot from working with fintechs.” It’s knowledge that will come in handy as more banks in Hong Kong and Asia add mutual funds to their mobile trading apps, as Standard Chartered did earlier this year.

There are limits, however, to how far a fund house can go selling products on mainland China’s digital platforms.

GBA play?

Those channels are limited to funds from either local licensed retail-facing houses, or offshore products eligible via MRF. The retail funds market in China, at $1.9 trillion, is only a fraction of the total investments industry, which is about $9.7 trillion – but that includes separate licensed businesses for asset managers linked to insurance companies, or to trusts, or to banks. Those businesses for now can’t market to retail or use sell via e-commerce players.

BEA Union is a joint venture formed in 2007 between Bank of East Asia and Germany’s Union Investments. Its initial business model was to service local pension and insurance customers, so its investment expertise has been mainly in Asian fixed income. It has since developed funds in Hong Kong and Asia equities, and its total AUM is now $11.2 billion.

It is the only foreign fund house to establish a wholly owned foreign enterprise (Woofie) in Qianhai (part of Shenzhen), as opposed to Shanghai. This was partly because the authorities in Qianhai were very welcoming, and because Bank of East Asia has a presence in southern China, and the fund house hopes to take advantage of this should cross-border opportunities emerge (under the concept of a “Greater Bay Area”).

This medium-term ambition is another driver of BEA Union’s strategy to build an online brand on Ant Financial and other digital platforms.

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Asset & Wealth Management

AllianceBernstein looks to add value to digital channels

Ajai Kaul, regional head, says the buy-side battleground is moving to banks’ evolving digital distribution.

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Ajai Kaul, AllianceBernstein

This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. We will also provide strategies from Invesco and BEA Union Investments. Go here for more insights into digital asset and wealth management.

Asset managers need to be ready to work with banks’ digital capabilities to reach retail investors.

Ajai Kaul, the Asia ex-Japan CEO at AllianceBernstein, a $580 billion investment firm, says digital distribution remains a puzzle for the industry. Although new channels are emerging, particularly in China, asset managers will likely adapt to what their existing distributors do online.

“Banks have the capital and the captive client base,” he said. “As asset managers, we deliver a product and service the client, including their digital engagement. So we need to understand how we’re going to plug into what banks are doing.”

Over the past two decades, banks in Asia have transitioned away from supermarket approaches involving dozens of manufacturers to a core set of perhaps 20 asset managers on the shelf.

Banks represent the vast majority of sales to retail investors in the region, so asset managers remain dependent keeping these relationships. Although buy-side firms recognize the importance of “digital transformation”, in Asia at least they are waiting to see which way their distributors move.

Follow the banks

“Banks are already responding with their own digital strategies and we need to continue to engage them and plug into their platforms,” Kaul said, adding this is likely to be more around operations, education and reporting than marketing or front-office activities. “We’re having conversations now about what this might look like…I do not believe banks are about to cede customers to the digital and online service providers.”

One aspect is likely to change how asset managers support distributors with things like marketing material. This will increasingly be less about papers and statements, and more about real-time online communication. And it will change the way asset managers arm financial advisors, bank salespeople and other intermediaries with information about their products, and about investing.

“People want convenience,” Kaul said. “They’re used to instant transactions. But we need to ensure that they understand what they’re buying.”

That principle sounds simple but it’s not clear how it will materialize. Does that information get communicated at point of sale, or via a continuous stream of back-and-forth with investors? Who is responsible for education – and who finances it?

The prize for getting this right is data-driven insights that enable fund mangers to build better products, with more tailored, suitable features, be it about liquidity, or asset classes, or risk. “You can scale faster if you get a real insight,” Kaul said. “And there’s a lot of data – if you ask the right questions.”

What about direct?

Is there a point at which asset managers will also go direct to consumers?
Kaul says this could emerge as a complementary strategy, but: “We’ll always be working with banks. Wealth management and financial advice are just tools for banks, along with loans, credit cards and foreign exchange.”

In other words, banks will retain the overall customer relationship, at least as far as asset managers are concerned – although banks themselves are now eager to cement their customer relationships in the face of being themselves swallowed up into “ecosystems” dominated by consumer-facing tech platforms.

Kaul is also looking at more direct digital channels, notably in China, where AB, as the firm is known, is licensed as a private fund manager, which can raise money from professional investors but not retail.

This makes PFMs unappealing to domestic banks, which can’t sell their products to their retail clients. Most sales are institutional in nature, but digital channels are becoming relevant.

This is still however more theoretical than real for firms like AB. But Kaul and his colleagues are putting time into studying the market.

“We need to understand mobile platforms and how we engage with them, in general,” he said. “In mobile environments, we can’t just be a product on a shelf.”

The China experience

So far the majority of funds sold in China through such channels are money market funds. But platforms such as Ant Financial, EastMoney and WeChat are beginning to develop more advice-based services that will help users with financial planning.

“How does a fund manager add value?” Kaul said. “If a transaction is on a mobile phone, that’s a very small piece of visual real-estate to work with, or become prominent on.” Fund products are usually three, four or five clicks away from where users spend their time on these platforms. Foreign fund managers do not enjoy brand recognition in China. “Just being a product isn’t sufficient to win traffic,” Kaul said. “You have to present something of value that creates interaction between the user and AB.”

He says China offers a good place to begin this learning process, given the popularity of these channels for everyday use. And within the Chinese context, these digital platforms are similar – if a fund house can master one, it can adapt a similar method to the others.

What’s special about mainland China isn’t the platform so much as it’s the investor culture, which ever since the stock markets appeared in 1990, have been habituated to short-term trading.

“How we build and deliver product may not match the local wealth market, which has developed its own biases toward duration, time horizons and the purpose of investment,” Kaul said. “But the population there has fully embraced mobile platforms, as we can see by the sheer volume of transactions now taking place. China is the front line of innovation.”

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What Credit Suisse’s Canopy deal means for private banking